Ideas matter. At the centre of the standoff between Indonesia and the International Monetary Fund – a standoff on which depends the economic future of East Asia – are the ideas of a thoughtful, ascot- wearing professor of economics from Johns Hopkins University named Steve Hanke.

Hanke is an expert on the once-obscure subject of currency boards. Currency boards flourished in the 1920s as an advantageous method of regulating the money of poor countries. They passed out of favor after the Second World War, but have made something of a comeback in recent years. Argentina’s President Carlos Menem snuffed out that country’s chronic inflation with a currency board and Estonia has also prospered thanks to its board. Hanke proposed to Indonesian President Suharto that he stabilize his country’s collapsing currency the same way. Suharto took up the idea, but the IMF is furiously opposed, and has made it clear no aid will be forthcoming unless Suharto forgets it.

Who’s right? What’s at stake?

A currency board is a substitute for a central bank. A central bank, like our Bank of Canada, issues local money more or less at will. It watches local inflation rates, interest rates, unemployment rates, keeps an eye on the value of the currency relative to gold and other countries’ currencies, and guesses as best it can how much or how little money to emit. When conditions are favorable and the central bankers are skilful, this method works pretty well: look at Alan Greenspan’s US$. When conditions are not so favorable and the bankers not so skilful, it can fail miserably.

The particular danger of central banking for a country like Indonesia is this. When times are good, lax bankers make a lot of flimsy loans. You operate a successful running shoe business in Jakarta and your bankers let you borrow, borrow, borrow. Every time a new loan is booked for you, new money is created. Where you used to have a million rupiahs in your bank account, you now have three million. Theoretically, the bank is supposed to issue only so many loans for every rupiah it has in reserve, but hey, who wants to ruin the party? Soon rupiahs are floating around everywhere and, for a while, people accept them more or less at face value.

Then comes a crisis. Rupiah holders start trading their wobbly local currency for US$s. The selling turns into a stampede, then a panic. The value of the rupiah plunges: from 2,600 to the US$, to 5,000, to more than 10,000. In a few days, 75% of the wealth in the country has been wiped out.

A currency board is a way to prevent this sort of panic. Instead of a central bank issuing rupiahs at whim, to suit the owners of the lending banks (who have a funny way of being friends and relatives of the president), the currency board takes over the job. It holds on to the government’s dollar holdings, and then issues local currency in strict proportion to the amount of dollars it has on hand. If the board sets the value of the rupiah at 5,500 to the US$, and it holds $10 billion, then it may issue 5.5 trillion rupiahs: no more, no less. Anyone who has 5,500 rupiahs has an ironclad guarantee they may trade it for US$1, no questions asked. If Indonesia prospers, if it earns dollars from its exports, then the currency board will issue new local currency up to the extent of the additional dollars; again no more, no less. A currency board works more or less the way the gold standard works, only with a foreign currency in place of gold.

So why is the IMF opposed to a currency board for Indonesia? Partly because the IMF, which is itself a club of central bankers, likes central bankers to have discretion. It believes in powers for bureaucrats, not in hard and fast rules.

But the IMF also has a valid concern: the Indonesian government is so corrupt – President Suharto was “elected” unopposed to his seventh five-year term on Wednesday; a relatively poor man when he took power, he is now a multibillionaire – the currency board will be used by the president’s family and friends to cash out their rupiahs for dollars, exhausting the country’s dollar reserves, and will then be abandoned without a thought for the welfare of everyone else.

When currency boards work, they work because they operate entirely beyond the control of the local government. That’s why they served the former European colonies so splendidly; and that’s why they are unlikely to work in an authoritarian regime like Indonesia’s. Which is maybe just a fancy way of saying the East Asian financial crisis is at bottom a political crisis: what has failed is not just the rupiah, but Indonesian authoritarianism and nepotism.